Neil Woodford released an interesting update earlier this week.
The UK’s most well-known fund manager warns we’re in a bubble.
The article is definitely worth a read if you have a few spare minutes. Woodford’s concerns are valid, in my opinion.
“There are so many lights flashing red I am losing count.” – Neil Woodford
Woodford believes the quantitative easing we have seen over the last decade has resulted in “inflated asset prices and inflated valuations.” He says investors have forgotten about risk.
The portfolio manager is particularly concerned about the stretch between value stocks and growth stocks. He argues that the difference between the performance of value stocks and growth stocks today, is “greater than at any stage in stock market history.” The chart below is no doubt concerning.
Source: Woodford Investment Management
As a result, Woodford is focusing on areas of the market that are out of favour, such as domestically-focused UK stocks. I’ve written recently about several of his latest purchases including ITV, Lloyds and Imperial Brands. Woodford believes his fund is well positioned to capitalise when the bubble pops, as it “inevitably will.”
Woodford is right
I totally agree with Woodford’s stance.
Investors have forgotten about risk right now. Volatility is bizarrely low, and has been for a while.
What concerns me most is the US stock market. The S&P 500 is up 20% for the year. Most FAANG stocks are up closer to 50% in that time. These growth stocks trade at crazy valuations. Amazon has a P/E of 300. Netflix 190. Executives such as Zuckerberg, Bezos and Cook are dumping huge quantities of stock. Something has to give.
Unfortunately, no matter how reasonably valued our market looks, if the S&P 500 pulls back, you can be sure the FTSE will follow. So I think it’s sensible to be cautious right now.
While I’m not selling any of my holdings in fear of an impending crash, what I am doing is keeping plenty of cash on the sidelines at present. My dividend portfolio is about 25% cash right now.
I’ve been nibbling away at attractive opportunities in recent months, including Woodford-owned stocks such as Imperial Brands and Lloyds. However, I certainly haven’t gone ‘all-in.’
I have plenty of capital in reserve, and I’ll be ready to deploy this when compelling opportunities arise. Patience is key.
Disclosure: Edward Sheldon, CFA owns shares in ITV, Lloyds Banking Group and Imperial Brands.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.